PRINCIPLES OF MICRO
PRINCIPLES OF MICRO ECON 211
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This 31 page Class Notes was uploaded by Noah Pouros on Saturday September 26, 2015. The Class Notes belongs to ECON 211 at Clemson University taught by Daniel Benjamin in Fall. Since its upload, it has received 63 views. For similar materials see /class/214219/econ-211-clemson-university in Economcs at Clemson University.
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Date Created: 09/26/15
Taxes ECON 211 Question No one seems to like taxes What effect do taxes have on behavior Introduction Taxes finance government spending Perunit taxes specific dollar value per unit Alcohol cigarettes gasoline Ad valorem taxes percent of price Hotel room taxes some import tariffs Who Pays a Tax Imposed on Sellers P CS288 PS288 PSquotT2205 CSquotT2205 50 Tax Revenue126 DWL9 New equilibrium at 29 and 21 Who Pays a Tax Imposed on Sellers Suppose 6unit tax imposed on sellers Raises opportunity cost of each unit by 6 Supply curve shifts up by 6 Who Pays a Tax Imposed on Sellers 50 26 24 50 Q Who Pays a Tax Imposed on Sellers Effects of tax on sellers Sellers harmed by 6750 Buyers harmed by 6750 9 of surplus lost DWL Tax drives a wedge between buyerssellers In aftertax equilibrium MB gt MC What Determines Tax Burden Tax burden Portion of tax paid by a party Tax not always paid by party it s imposed on Tax burden depends on SampD elasticities More inelastic side faces relatively more burden What Determines Tax Burden CS falls with tax on sellers PS doesn t change STax What Determines Tax Burden CS falls PS dOesn t change NO DWL All tax burden being born by Tax Revenue the buyers What Determines DWL from Tax Examples suggest elasticities also affect DWL DWL affected by distortion in quantity Low elasticity implies small quantity response Low elasticity suggests small DWL Does it Matter Which Side Gets Taxed P At 50 S 29 26 23 lt and after tax falls D 2 L r 24 50 Q Recap Taxes fund government spending Taxing sellers may harm buyers amp vice versa Taxes often create deadweight loss Tax burden and DWL driven by elasticities Tends not to matter on whom tax is imposed The Monopoly Problem ECON 211 Question Invent energy source with no good substitutes What price do you charge Introduction Supplydemand uses perfect competition Each seller a pricetaker no influence on price One extreme of possible market structures Introduction At other extreme is monopoly Single seller serves the market This seller can affect price Examples of monopolies Public utilities Cable companies in some areas Patent holders like drug companies Introduction Monopoly depends on how market is defined Main idea is market power Power over price Firms with market power also known as pricemakers pricesearchers pricesetters The Perfect Competition Benchmark Use as reference point Lots of small buyers and sellers Products are perfect substitutes Mobile resources Yields supplydemand curves equilibrium etc The Perfect Competition Benchmark P n S Horizontal sum of all sellers MC curves Horizontal sum of D all buyers MB curves P0 and Q0 maximize sum of CS and PS Would a Monopolist Choose Po and 00 p A 300 150 m A Seller s MC curve Inverse demand curve P300Q Would a Monopolist Choose Po and 00 To answer don t need optimal price amp quantity Does another price amp quantity give greater profits MBMC comparison provides easy answer Would a Monopolist Choose Po and 00 Suppose monopolist 1 price from 150 to 151 Total revenue falls by 1 TRO 150unit x 150 units 22500 TR1 151unit x 149 units 22499 Total cost falls by 150 MC of 150th unit Would a Monopolist Choose Po and 00 T price to 151 lowers TR but TC falls more Profits increase by 149 Raising price above PO is a good move MBMC tradeoff T price more also a good move The Monopolist s Problem Determine most profitable price and quantity MBMC approach still applies Monopolist maximizes profit by setting MB MC Same logic used by perfect competitor The Monopolist s Problem Main difference is nature of demand faced Monopolist entire market demand PC firm demand perfectly elastic at market price The Monopolist s Problem Why does difference matter PC firm can sell all it wants without affecting price Monopolist must cut price to sell more Cut applies to units that could sell at higher price The Monopolist s Problem Original example inverse demand P 300 Q Q P TR MR 98 202 19796 99 201 19899 100 200 20000 101 199 20099 102 198 20196 The Monopolist s Problem Why is MR lt price Price cut on units that could sell at higher price TR98 202 x 98 TR99 201 x 99 201 x 1 201 x 98 MR99 TR99 TR98 201 x 1 201 x 98 202 x 98 201 x 11 x 98 The Monopolist s Problem 300 MC Q P300Q 300 Q Recap Monopolist is sole seller in the market Faces entire market demand contrast to PC firm Maximizes profit using MBMC tradeoff Compared to competitive equilibrium Monopolist charges higher price Monopolist sells smaller quantity Monopolist earns more producer surplus
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